Advantages of arbitration

Advantages of arbitration applied in practice

Corporate lawyers and attorneys who advise on dispute clauses in contracts are regularly asked what the advantages of arbitration are compared to resolving a business dispute through the courts. To enable them to make the right choice, the NAI has used a practical case to clarify the differences between the two forms of dispute resolution. If you would like to know more about a specific advantage of arbitration, please use the navigation on the left side of this page. An overview of the differences between arbitration and court proceedings can be found here.

The case: An offshore wind farm in the Middle East

A large Dutch construction company has won a tender for the construction of an innovative offshore wind farm in the territorial waters of a Middle Eastern country. The project is seen as an important step in the energy transition for both the Netherlands and the Middle East, and has received a lot of attention from the media and investors.

During construction, a dispute arises between the construction company and the client, a consortium of energy companies. The client claims that the foundations of some of the wind turbines do not meet the agreed specifications, which could lead to instability. The construction company claims that the foundation was built according to specifications and that the alleged problems are the result of design changes made by the client at the last minute. The financial value of the contract is €80 million. The financial value of the dispute is €17.5 million.

The client is refusing to make a substantial payment and is threatening to terminate the contract and bring in another contractor. The construction company is not only risking a large sum of money, but also its reputation as a reliable partner in complex energy projects. The client also wants to prevent damage to its image and wants to finish the project without
further delay.

Advantage 1: Confidentiality

Company lawyers see confidentiality as one of the most important advantages of arbitration. The proceedings are not public, which protects the reputation of the parties and keeps business processes secret. This can be of great value to companies in particular, as it limits the risk of reputational damage or the leakage of sensitive information, including competition-sensitive information.

‘Arbitration confidentiality is of great value to us as a tech company. We don’t want to run the risk of competition-sensitive information becoming public or our reputation being unnecessarily damaged.’ Quote from company lawyer

Advantage 2: Speed

One of the major advantages of arbitration is the speed with which disputes are settled. The average duration of an arbitration procedure is only 12 months, whereas cases in court can take several years.* Moreover, an arbitral award is final and binding on the parties, with limited possibilities for annulment and no long appeal procedures. This means that the parties know where they stand and are not burdened by prolonged uncertainty about the outcome of their dispute.

‘With arbitration, I don’t have to keep entering a claim in the books and keep explaining to the board why the award has been postponed yet again. Within 12 months, we have a final judgement that we can move forward with.’ Quote company lawyer

Advantage 3: Lower total costs

Although the costs of arbitration are higher than those of court proceedings, arbitration is often more advantageous overall. This is due to the shorter duration of the procedure (one factual instance/no appeal) and, as a result, the lower legal costs. In lengthy court proceedings, the costs quickly add up.

‘Of course, arbitration also costs a lot of money, but at the end of the day it is often not too bad compared to a court case,
where an appeal is possible and often used when the stakes are high. The trick is to keep costs under control through tight management and targeted research. Then arbitration usually remains more advantageous than years of litigation.’ Quote company lawyer

Advantage 4: Customisation

Arbitration proceedings are characterised by a high degree of flexibility. For example, a case management conference will be held at an early stage to adjust the dispute and customise the procedure. It is also possible to split complex disputes into sub-topics (bifurcation) and to issue separate expert assignments for these. Furthermore, the entire procedure can be conducted in English. This flexibility makes arbitration very suitable for complex, international disputes.

‘The flexibility of arbitration is a godsend for international disputes. We can conduct the proceedings in English and organise them in such a way as to resolve the dispute efficiently and effectively. That is customisation that really benefits our company.’ Quote company lawyer

Advantage 5: Expertise

Arbitration offers parties the opportunity to submit their dispute to expert arbitrators with relevant expertise. There is a wide choice of specialised arbitrators available, which means that the specific nature of the dispute can be optimally addressed. This contributes to a high-quality substantive treatment and a well-founded decision.

‘Our procedures involve highly complex construction projects. It is therefore essential that the arbitral tribunal really gets to the heart of the complexity and understands what it is about. With Arbitration, we have the option of selecting arbitrators who have specific expertise in the area of our dispute. This gives us confidence that the complex parts of the case will be fully understood and taken into account in the final judgement. Finding the right expertise is crucial for a professional assessment of our dispute.’ Quote company lawyer

Advantage 6: Fair award of legal costs

In arbitration, legal costs are usually divided in proportion to the degree to which a party is proven right. In addition, an arbitral tribunal can include all reasonable legal costs incurred. In court, the party proven right is only reimbursed a fraction of the legal costs. The approach in arbitration has a dampening effect on the filing of hopeless claims and ensures a fair distribution of the costs of the proceedings.

‘I think the system of reimbursement of legal costs in NAI arbitrations is a strong point. If I have a strong case, I don’t have to be afraid of high costs. I know that these will largely be reimbursed by the losing party. That is a comforting thought. At the same time, it prevents the other party from filing hopeless claims to put us under pressure. The distribution of costs is simply fair: the stronger your case, the more costs you will be reimbursed for.’ Quote from company lawyer

Advantage 7: Enforceable worldwide

Arbitral awards are internationally recognised and easily enforceable in most countries around the world. This is thanks to the New York Convention, which more than 170 countries have signed. For international disputes, this is a major advantage over going to court, because if an award is not recognised in the country where the other party’s assets are located, the proceedings must be conducted again.

‘Our company operates worldwide, so an award limited to the Netherlands or Europe is not always useful to us. Arbitration offers the great advantage that we can enforce the outcome practically anywhere in the world. The other party will therefore also be more inclined to comply with the arbitral award. As an international player, that gives us the protection we need.’ Quote from company lawyer